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Taxing Times

Preparation business is changing, but don’t blame the Internet


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Blockbuster … Borders … H&R Block? Over the past two decades, the Internet has made mincemeat of previously indestructible business models. Amazon destroyed the bookstore. Netflix destroyed the video store. It only seems natural that online tax filing services would do the same to the traditional brick-and-mortar tax preparation industry, including franchises like H&R Block, Jackson Hewitt and Liberty Tax Services.

Not so fast. 

There’s no question online tax prep is changing the tax-filing business, just not in a company-destroying manner. In fact, it doesn’t appear to be changing demand for tax help at all. 

Consider: In 2007, 41.4 percent of tax filers filed their own return. By 2010, 40.78 percent of filers filed their own return. Over the past decade, according to IRS numbers, the percent of filers who file their own return has shifted between 37 percent and 42 percent.

“The number of returns grows about 1 to 2 percent a year,” said Jason Houseworth, president of U.S. Tax Services for Kansas City-based H&R Block. That level of growth “has been unbelievably consistent. But understand that roughly 60 percent of the market files through a preparer. The rest file their own return. That number hasn’t changed over the past decade. And nothing tells us that it will change.”

In other words: Although software products and online services have taken a weekend of work surrounded by reams of paper and whittled it into a few hours, that has done little to ease demand for tax preparation. The IRS and federal tax code still intimidates the bulk of the taxpaying populace. 

“There are very different attitudes when it comes to how people want to do consumer tax preparation,” Houseworth said. Regardless of whether the person is a first-time filer or someone with numerous deductions, “The 60 percent view a tax return as inherently complex. The assisted client says, ‘I value the time I want to get back. I just want to delegate this to somebody else.’” 

On the other hand, Houseworth says, “The do-it-yourself filer doesn’t understand how anybody would want somebody to do their taxes. They don’t want to hand it over to anybody else.”

Those filers, by the way, are shifting to online services quickly, which is only hurting the tree-killing industry: In 2007, 18 percent of self-filers filed electronically, while 14.42 percent used paper. By 2011, 32 percent of filers filed online, and less than 6 percent used paper. 

Industry officials are defensive about the idea the Internet may be taking their business, perhaps because so many people are incorrectly suggesting that’s the case. (Officials at Virginia Beach-based Liberty Tax, for instance, did not return repeated requests to be interviewed on the subject.)

“What I get really frustrated by is we get people asking us questions, ‘Now I assume this industry is going to be like a Blockbuster to Netflix,’” Houseworth said. “Nothing tells us that renting a video is close to preparing your taxes. Something like 87 percent of filers get an average of $2,700 back. That is not renting a video. This is a big financial transaction.”

But there is one thing that has affected tax services: high unemployment. The spike in joblessness in 2008 and 2009 had a clear impact on the tax preparation business because fewer working people have meant fewer returns. The number of returns actually dropped from 143 million in 2009 to 141 million in 2010, for instance. 

In 2011, Parsippany, New Jersey-based Jackson Hewitt went through bankruptcy reorganization amid regulator crackdowns on refund anticipation loans, a major aspect of the company’s business. Liberty Tax, however, has managed to grow: The chain, started in 1998 by Jackson Hewitt founder John Hewitt, has seen unit count grow from about 2,700 in 2008 to 4,200. 

H&R Block is the dominant player in the tax-preparation market, with 18 percent of paid tax services, more than five times the combined market share for Jackson Hewitt and Liberty Tax. Its business is growing domestically, but it still hasn’t recovered from its recessionary drop. 

In 2008, H&R Block had 13,038 offices in the U.S. It currently has fewer than 11,000. In 2008, the company and its franchisees prepared 16.1 million tax returns at retail locations in the U.S. In its 2012 fiscal year it prepared 14.9 million. That number is up 4.5 percent over the past two years.

And the company has offset those numbers with its digital business, which now represents about a third of the returns it handles. In its last fiscal year, more than 7.4 million people used the company’s software product or its online services. That’s up 31.5 percent in six years. But most of its digital customers go online—more than 4.4 million filers used its online service, nearly triple the number that used the Internet through H&R Block in 2007. 

Another change may be with mobile devices: apps for tablets and smartphones. A growing number of filers are using mobile apps to file their taxes. “Now mobile is our fastest-growing channel,” Houseworth said. But he noted mobile filers are taking the business from paper filers. 

And, he noted, people who use prepared services aren’t shut out of the technological tax revolution. In fact, they may be at the forefront. Tax-prep customers can use the H&R Block app to take a picture of their W-2 with their phone, send it online so the tax professional can see it in their office, even if the customer doesn’t walk in the door, Houseworth said. 

“We had more assisted clients who accessed one of our mobile products than we did do-it-yourself,” Houseworth said. 

The reason? They wanted to check their refund status online. 

 

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